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Cap-and-Trade Market Spanning North America Weighed by States

Published: December 1, 2010
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Source: BW

 California, New Mexico and 10 U.S. Northeastern states may try to create a North American carbon market on their own now that President Barack Obama has given up on cap-and-trade legislation that stalled in Congress.

The emissions-trading system would be based on a planned carbon market in California, the most populous state, and an existing regional cap-and-trade program for power plants in the Northeast, according to state environmental officials. Three Canadian provinces have also shown interest in a cross-border carbon-trading system, the officials said.

“The key is to have as large and as liquid a market as possible,” John Yap, British Columbia’s climate-change minister, said in a telephone interview. Under cap-and-trade, the government creates a market for pollution rights by issuing a limited number of carbon-dioxide permits, which companies can buy and sell.

The prospects for a North American market got a boost Nov. 2 when voters in California rejected a ballot measure that would have delayed that state’s global-warming laws. Talks that began last year, as cap-and-trade legislation backed by Obama faltered in the U.S. Congress, will resume when state environmental officials meet in Washington this week.

The states and provinces weighing a unified carbon market represent about one-third of the combined $15.5 trillion U.S. and Canadian economy, according to government statistics and the International Monetary Fund.

After Republicans won control of the House and narrowed the Democrats’ Senate majority in the Nov. 2 midterm elections, Obama said cap-and-trade “was just one way of skinning the cat” and that he doubts it could pass Congress until 2013 at the earliest. In Canada, the national government has said it won’t set up its own cap-and-trade program unless the U.S. does.

Close to the Coasts

A carbon market established without the support of the U.S. and Canadian governments would probably “stick pretty close to the Atlantic and Pacific coasts and not venture too far inland,” Ethan Zindler, a Washington-based analyst with Bloomberg New Energy Finance, said in an interview.

Such a cap-and-trade system may cover more than 800 million metric tons of carbon dioxide a year, making it about one-third the size of Europe’s cap-and-trade program, according to New Energy Finance estimates.

California plans to start a cap-and-trade program in 2012. It may be joined by New Mexico and the Canadian provinces of British Columbia, Ontario and Quebec, which also have cap-and- trade laws, according to California officials. Links to the Regional Greenhouse Gas Initiative, a trading program covering 10 states in the Northeast, are also being explored, according to Mary Nichols, chairman of California’s Air Resources Board.

Not Being Alone

“Nobody, including us, wants to be alone in implementing a cap-and-trade program,” Nichols said on a conference call after the defeat of the ballot measure.

The 10 states in the Northeast have been auctioning carbon- dioxide permits, or allowances, since 2008. The Regional Greenhouse Gas Initiative’s quarterly auctions have raised $729 million so far. The next auction is scheduled for tomorrow, with results to be released Dec. 3.

Revenue from the auctions is falling because power plants are producing less electricity in the weak economy and need fewer carbon allowances. Auction revenue from the first three quarters of this year fell 18 percent and some allowances have gone unsold, according to data from the regional cap-and-trade program.

Budget Shortfalls

While most of the money from the Northeast auctions is set aside for renewable-electricity generation and energy-saving projects, New York, New Jersey and New Hampshire have used some of it to help close budget shortfalls.

The rules of the Northeast’s cap-and-trade market are scheduled for review in 2012 and “some discussions” have been held about aligning the program with the California-led system, James Brooks, air-quality director of the Maine Department of the Environment, said in a telephone interview.

Linking the regional cap-and-trade programs to function as a single carbon market would require complex negotiations on “a whole litany of issues,” Brooks said. The minimum bid for an allowance in the Northeast’s cap-and-trade program is $1.86, while California wants to set the price floor for carbon permits at $10, he said.

State officials must also weigh the support such a North American carbon market would get from newly elected governors, he said.

“Many of us will have to go back and check in with the new administrations,” Brooks said.

Republican Governors

In the U.S. Midwest, where six states have been debating whether to create their own carbon market, this month’s election will probably prevent the region from joining cap-and-trade systems on the coasts, Mike Robertson, an environmental-policy consultant with the Minnesota Chamber of Commerce, said in a telephone interview.

Of the six states in the Midwestern Greenhouse Gas Reduction Accord -- Iowa, Illinois, Kansas, Michigan, Minnesota and Wisconsin -- Democrats lost the governor’s race or control of the legislature to Republicans in five, according to data from the National Conference of State Legislatures. Many Republicans in national and state politics have opposed cap-and- trade, which they say is an energy tax in disguise.

“I don’t think the new leaders in the legislatures or in the governors’ offices will be interested in pursuing a regional cap-and-trade program,” said Robertson, who served on an advisory panel for the proposed Midwest system.

While debating the technical aspects of a North American carbon market, the state officials meeting this week are also likely to review the election results and “what they think that means within their individual states,” Doug Scott, director of the Illinois Environmental Protection Agency, said in a telephone interview.

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